Asset Allocation in Bankruptcy

Abstract

This paper investigates the consequences of liquidation and reorganization on the allocation and subsequent utilization of assets in bankruptcy. Using the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into liquidation, we find that the long‐run utilization of assets of liquidated firms is lower relative to assets of reorganized firms. These effects are concentrated in thin markets with few potential users and in areas with low access to finance. These findings suggest that when search frictions are large, liquidation can lead to inefficient allocation of assets in bankruptcy.

Restructuring vs. Bankruptcy

“…(Below, we show that a single parameter, 15 For the microfoundations of this wedge in value, see, e.g., Aghion and Bolton (1992), Hart (1995), and Shleifer and Vishny (1992). For evidence on the deadweight costs of liquidation, relative to reorganization, see Bernstein, Colonnelli, and Iverson (2019).…”

Economic efficiency of regulating bank debts on the basis of a debt enforcement (arbitrary procedure)

“…Еще один вопрос, обсуждаемый в иностранной литературе, -финансовые издержки и поступления при удовлетворении требований кредиторов. Данные вопросы поднимаются в работах S. Bernstein, E. Colonnelli, B. Iverson [30], J. Reindl, N. Stoughton и J. Zechner [31], M. Frieden, S. Wielenberg [32].…”

Efficient priority rules under default: the case of traditio versus contract principle

“…We differ from the vast economic literature on value distribution and bankruptcy in that they mainly focus on how well different bankruptcy systems facilitate the transfer of assets to their most productive uses (e.g. Hotchkiss 1995;Maksimovics and Phillips 1998;Hotchkiss et al 2007;Bernstein et al 2018). These empirical economic studies that compare different legal regimes tend to be limited to comparisons between US Chapter 11 and Chapter 7 experiences.…”